Cement 75% Gains With Cemex - Barron's

Stock market turbulence and the U.S. housing slowdown have cut cement maker Cemex's (CX) stock by 30% since last June. Unfairly, says Barron's, as worldwide demand remains high, supplies are tight and prices stable. Sales rose 30% Y/Y in Q4'07 to $5.8 billion and are 19% higher overall in 2007 at $21.7B. 2008's second-half predicted Ebitda growth rate of 22% should surpass the 14% growth rate achieved annually since 2000. Last year's Rinker buyout should yield $400 million in cost savings, and management plans to invest half of $3B in cash flow in high-yield projects, using the other half to pay down debt.

Cemex's geographical diversity also helps: The U.S. contributes 23% of sales, and Mexico accounts for 18%. But that should change as Mexico's government ups its 'cement-intensive' infrastructure spending to $7.5B this year. Cemex operates in 50 countries, but not in potentially lucrative China and India -- until its sharp management determines that risks are mitigated and long term growth is ensured. A 3% dividend yield is the cherry on top. Cemex shares trade at 8-9 times 2009 earnings, when bulls say it should be at 12-14 times, or 50%-75% higher than $25.68 currently. With its stock currently reflecting a deep recession, Barron's sees $38-$44 shares when those fears have passed.

Comments

[Urbane Gori...:]

Can't argue with the Market .. The price is what the price is..

2008 Mar 09 09:05 PM

[Davy V. Bui:]

I'll probably thumb through the Barron's story later this week but I'd be curious to see if they discuss operating income as opposed to sales in the article. I posted my research report on Cemex sometime last year (you can find it here).

Cemex has major operating leverage in its domestic and US markets. When I did my report, Mexico & the US accounted for 20% and 23% of revenues, respectively but the two combined for 67% of total operating income, with Mexico at 38% of that total.

I admit that those figures may be slightly outdated now but it seems unlikely that they could have shifted their operating income mix that much this fast so the numbers above probably aren't too far off.

I also mentioned in a separate post some of the headwinds the Mexican economy may face as it becomes a net oil importer. Pemex tax revenues accounts for 40% of Mexican GDP. That's a crazy number. As the money flow from Pemex slows, government may not be able to fund the housing and infrastructure programs currently on the books, which would due to their operating leverage in Mexico could really hit the Cemex bottom line.

That was my last line of thinking on this stock. I'd be interested to read what insights others may have on it.

2008 Mar 10 01:18 AM

[beegdawg007:]

Be careful... it takes a lot of coal to make cement... the paste, not concrete... COAL prices are going to at least double in 2008. Do some homework. Google coal to get a feel for what is going on here. Operating expenses for cement manufacturers are going up a bunch in 2008.

2008 Mar 10 03:23 AM